A: Raising money is like painting a room. A lot of
the work is in the preparation. But if prepped right, the job goes
rather quickly and easily.

When raising capital, entrepreneurs often skip the preparation
stage and move right into dialing for dollars. This is fatal to the
capital formation process because investors, particularly those who
make equity investments in risky, early-stage businesses, are
temperamental. The slightest deviation from convention, or even a
missed telephone call, can spell the difference between success and
failure.

Here are steps to take before you even think of calling on
investors:

1. Write a business plan. Guess what? Most investors
will report they never even read them--but they still want to see
that you've done the work. It's through writing a business
plan that you gain the ability to present your deal and answer
questions with the kind of conviction that gets investors to reach
for their checkbooks.

Once you've put the plan together, write a two-page
executive summary. You'll need it when investors ask you to
send them "a quick write-up."

2. Have an accountant prepare historical financial
statements. You can't talk about the future without
accounting for the past. Internally generated statements are OK,
but investors want the comfort of knowing an independent expert has
verified the information. In addition, if you're taking less
salary than you think you deserve, historical financial statements
are the best way to document the company's accrued liability to
you.

3. Line up references. An investor may want to talk
to your suppliers, customers, potential partners or your team of
professionals, among others. When an investor asks for permission
to contact references, promptly answer with names and numbers;
don't leave him or her waiting for a week.

4. Figure out your sizzle. Investors will ask what
you do. Give them a memorable answer that they can repeat to other
investors. The founders of Xyplex Networks, a Littleton,
Massachusetts, company with a difficult name and an even more
difficult-to-understand technology, said to investors "We are
the company that turbocharges your DEC computer."

5. Get warm-body introductions. You must decide what
kind of investors are right for you. But once you've made this
decision and isolated your prospects, get personal introductions to
as many as possible. Cold calling is the most difficult way to
go.

Q: Is it worth my time to call venture capital firms when
I'm looking for money?

A: You should look for venture capital but probably not
from professional firms. Incidentally, this is another reason
raising money is so hard: Entrepreneurs tend to look in the wrong
places. Institutional venture capital is wonderful stuff, but it is
an extremely limited source of financing that is appropriate for
just a small number of companies. Here's a diagnostic test:

Are you a technology company? Most professional venture capital
firms invest in technology. Why? Breakthroughs in products or
services create opportunities to dominate a market. Look how Ed
Land and his Polaroid camera created--then dominated--the instant
photography market with new technology.

Do you need $500,000 or more? Few venture capitalists look at
deals for less. Why? With many venture partnerships looking to
invest $100 million or more, they want to do 20 $5 million deals
rather than 200 $500,000 deals.

Will you go public or be acquired? If not, there is no payday
for the venture capitalist, hence no interest.

Can you reach $50 million in sales in five years? Of course,
every venture investor is different. But taking into account the
numbers on margins, valuations, time horizons and the required rate
of return, only companies of this size make sense for professional
venture capitalists. Venture investors know this and tend to shy
away from companies that may be star performers but are too small
to make a difference to the investor's portfolio.

Before you rule out venture capital, keep in mind one critical
distinction. The words "venture capital" are generic in
nature, referring to equity invested in young, risky companies.
Institutional venture capital is out of reach for perhaps 99.8
percent of businesses. But venture capital from individuals (angel
investors) is appropriate for almost every early-stage business.
(For more on angel investors, see "Raising Money,"
January.)

Q: Should I hire a financing consultant to help me find
money?

A: It can be a good idea. If you've never raised
capital before and don't understand the issues, hiring a
consultant might be wise. The advantage a consultant offers can be
likened to the value an insurance agent brings to the table. With
intimate knowledge of several carriers, an agent can often do a
better job finding you insurance than you could on your own. But
just as a bad insurance agent will probably get you bad insurance,
a bad financing consultant will likely get you undesirable
financing. So here's what to do:

Structure fees carefully. Contingency arrangements may save
fees, but several things can go wrong. First, if prolonged effort
is required, consultants may run out of steam. Second, if they
don't run out of steam, they might push a certain transaction,
not because it's in the best interest of their client, but
because it's the fastest route to the closing table and their
back-end fee. Third, and this may sound odd, entrepreneurs tend not
to take the advice of professionals whom they are not paying. This
can cause the consultant to become prematurely discouraged and
often leads to the collapse of the relationship.

The ideal fee structure is a modest monthly retainer with a
success fee, usually a percentage of the capital raised--or, more
often for smaller deals, an equity stake in the company on the back
end.

In the case of a public offering, investment bankers sometimes
refuse to pay intermediaries because it reduces the amount of
compensation they can earn from a deal, according to National
Association of Securities Dealers regulations. Likewise, in some
private transactions, investors prefer to not pay off a financial
intermediary.

Experienced consultants know this, and shop their deals to
sources of capital that protect their fees. But it doesn't
always work out; consultants often end up working with investors
they've never met before. Situations can get sticky, with the
entrepreneur actually mediating between the would-be investor and
their own consultants.

You can avoid many of the problems of equity compensation by
having consultants buy their equity cheaply before the search for
capital begins. Of course, if the consultants don't produce,
you may have unwanted, and sometimes cantankerous, minority
shareholders. The whole process is structurally imperfect, and as a
result, plain old fees are sometimes the best way to go.

Make sure there is a 60-day out-clause in your contract. If you
aren't put in contact with investors within this time frame,
your deal is probably withering.

Check references. It's amazing how many entrepreneurs hire
consultants without looking into their past. To do this, speak to
the principals of three firms the consultant has worked for. Did
they add value? Did they do what they said they would? Did they act
professionally? Most importantly, did they raise the money
needed?

The absence of codified professional standards when it comes to
raising capital probably accounts for the voluminous number of
financing consultants. In truth, just about anybody can hang out a
shingle. While there are plenty of qualified financing consultants,
the first rule for hiring consultants is buyer beware.

Q: Should I consider an initial public offering
(IPO)?

A: The likelihood of taking your company public is even
smaller than the likelihood of securing institutional venture
capital. In 1996, 874 companies went public. A big number, yes, but
not when you consider that there are some 600,000 new business
incorporations each year.

Happily, there are several alternatives to an IPO that are far
more appropriate for emerging growth companies. These include
direct public offerings, reverse mergers and exempt public
offerings.

With direct public offerings, a company sells shares directly
to shareholders. These are best for companies with a large, loyal
customer base.

Reverse mergers occur when a private company is acquired by a
dormant public company and, in the process, becomes publicly held.
The reasoning goes that as a public company, its options for
securing financing increase dramatically.

Exempt offerings are exempt from state and federal securities
laws. This is important because it is the existence of securities
regulations which makes conventional IPOs so difficult. The federal
government and almost every state have exemptions for public
offerings of $1 million or less. They're worth looking into
because by utilizing them, companies can gain direct access to
individual investors. (Read "Raising Money" in April for
more on exempt offerings.)

David R. Evanson, a writer and consultant, is a principal of
Financial Communications Associates in Ardmore, Pennsylvania. Art
Beroff, a principal of Beroff Associates in Howard Beach, New York,
helps companies raise capital and go public.